Reference no: EM132958071

Question - The Saudi-Bahrain Farmers association approached Salam Bank, which was actively involved in agricultural financing to finance the wheat crop of its members that was expected to be harvested in the beginning year of 2021 using Salam Financing Contract. On 30 July 2020, Salam Bank entered into a Salam financing contract whereby the bank bought from Saudi-Bahrain Farmers Association 100,000 metric tons of wheat (the specifications of which are detailed in the contract) for $200,000. It was also agreed that Farmers Association would deliver the wheat after 6 months from the date of signing contract. On 10 August 2020, Salam Bank paid full amount of the contract into the account of Farmers Association.

On 31 October 2020, Salam Bank managed to sign a separate parallel Salam contract with Abu-Dhabi Company whereby it was agreed that the former sell to Abu-Dhabi company 100,000 metric tons of wheat for $250,000. The specifications of the wheat are identical to those that will be supplied by Saudi-Bahrain Farmers Association and it was agreed by the two parties that Salam Bank would deliver the wheat after 5 months from the date of signing contract. On 1 November 2020, Abu-Dhabi company paid half of the amount of the contract to Salam Bank. In addition to that, Salam Bank and Abu-Dhabi Company mutually agree that Abu-Dhabi Company also pledge its financial assets as collateral which is worth of another half of the payment.

On 31 January 2021, Saudi-Bahrain Farmers Association delivered 100,000 metric tons of wheat to Salam Bank and the Bank delivered the wheat to Abu-Dhabi Company. Meanwhile, Abu-Dhabi company then paid the remaining amount of the wheat on the same date and retrieve his financial assets as it was collateralized before.

You are required to:

a. Show diagram of Salam cum Parallel Salam Financing contract and Prepare the necessary Journal entries in the books of Salam bank to record the Salam and Parallel Salam Contract.

b. Show how the necessary transactions should be presented in the financial statements of Salam Bank at the end of the year 2020 assuming that the value of Commodity (Wheat) has declined by 5%. Should Salam Bank recognize any earnings at the end of the year?

c. Assume that Saudi-Bahrain Farmers association was not able to deliver the Wheat on the agreed date and only able to deliver after 9 months from the date of signing the contract. Salam Bank has to buy the wheat from other supplier for $265,000. Show journal entries to record this transaction.